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Be Careful, Starbucks

Is a new rewards program stiffing regulars?

I'll say this for Starbucks(NASDAQ:SBUX): Its most free-spending regulars aren't stupid.

But they are unhappy. They don't like the switch from the coffee champ's membership-driven Gold Card 10% discount program to what the company now calls My Starbucks Rewards, officially activated last week. The math doesn't favor Starbucks loyalists, writes reader Michael Turner at the blog StarbucksMelody.com:

This is a total step down for current Gold Card members. Assume someone goes every morning, at $4 a trip. After 15 stars they've spent $60 and will get a coupon worth $4, a 6.6% savings. The new program will be an improvement for the guy getting a daily drip coffee if he spends that coupon on a latte, but definitely not for the super regulars. Starbucks needs to add a third level to the program for super regulars – 50 stars? – and bring back the 10% discount.

He's referring to the tiered system inherent with My Starbucks Rewards. At the first tier, Green, achieved after five qualifying purchases, members get free refills on brewed coffee, free add-ons such as syrups, and a free beverage with every purchase of a pound of whole bean coffee.

Gold members get more -- just not the 10% discount for which they paid an annual $25 under the old program. Regulars earn a free drink after 15 qualifying purchases, and receive both a personalized card and coupons.

The wrinkle: My Starbucks Rewards is exclusively for those who purchase with a prepaid card. Cash and credit were acceptable under the old system. Now, Starbucks wants the float provided by such prepayments all to itself.

That's understandable. Capturing cash ahead of goods sold creates high cash conversion, as has been true for e-commerce titans such as Amazon.com(NASDAQ:AMZN) and Dell(NASDAQ:DELL). It's also what makes insurance such an attractive business as well.

But this change also may be more than a nice-to-have step for Starbucks. Gross margin fell two percentage points in fiscal 2008, the year Starbucks first introduced its first Gold Card program, and has yet to recover. The implication? Gold card regulars may have been getting far more than $25 worth of value from the program, costing the coffee king points on the top line.

Starbucks also has strong competitors in Green Mountain Coffee Roasters(NASDAQ:GMCR) and Peet's Coffee & Tea(NASDAQ:PEET), among others. Management appears to be acutely aware of the pressure to increase margins where it can.

"We expect positive comparable store sales this year.And the combination of that with increased cost [savings] are what we believe drives the margin improvement in the year ahead," said Chief Financial Officer Troy Alstead during the fiscal fourth-quarter conference call in November, according to a transcript made available by Seeking Alpha.

My Starbucks Rewards could help in that effort, but only so long as loyalists like Michael Turner keep buying as they have. Be careful, Starbucks. You can't afford to anger or alienate your core customers right now.

Now it's your turn to weigh in. Are you more or less likely to frequent Starbucks as a result of its new rewards program? Make your voice heard using the comments box below.

Author

Tim Beyers first began writing for the Fool in 2003. Today, he's an analyst for Motley Fool Rule Breakers and Motley Fool Supernova. At Fool.com, he covers disruptive ideas in technology and entertainment. Find him online at timbeyers.me or send email to tbeyers@foolcontractors.com. For more insights, follow Tim on Twitter.